Surrogates of Fiscal Federalism

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Moris Stone
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Surrogates of Fiscal Federalism Francesco Saraceno OFCE-Research Center in Economics of Sciences Po Luiss School of European Political Economy Jakarta

1 Surrogates of Fiscal Federalism Francesco Saraceno OFCE-Research Center in Economics of Sciences Po Luiss School of European Political Economy Jakarta School of Government and Public Policy Europe 2020: Paths for Reinventing Europe s Future European Economic and Social Committee Conference Brussels July 6th, 2015

2 The Berlin View The intellectual reference is the market efficiency hypothesis No role for fiscal or monetary policy in boosting growth: Importance of fiscal discipline Exports rather than domestic demand should be the basis for growth Club-Med countries had out-of-control public finances As a consequence, blame, and adjustment is only on countries in difficulty. Fiscal Consolidation! Structural reforms allow competitiveness to be restored 2

3 The Berlin View The institutional consequences of the Berlin view EMU fiscal coordination happens from the bottom, through strict fiscal discipline (the «fiscal compact» as a fiscal union) Monetary policy should limit itself to price stability. No role for OMT s, insurance, and so on. The best for growth is a stable inflation environment Notice that the Berlin View is nothing else than the Washington (Brussels) consensus, and is already embedded in the Maastricht treaty. Stability and Growth Pact limits fiscal policy to automatic stabilization The ECB mandate, contrary e.g. to the Fed, is limited to the inflation objective 3

4 The Structural Imbalances Narrative The EMU is a non-optimal currency area Convergence of interest rates (wrong perception of markets) led to capital flows from core to periphery Capital used for consumption: private (Spain, Ireland) or public (Greece, Portugal maybe Italy) Corresponding high debt, in a foreign currency (the euro) Global imbalances, and need for rebalancing through Symmetric adjustment (deflation in periphery and inflation in core) Co-ordinated, not synchronized fiscal policies (global demand support) Role of ECB in debt management (LOLR Monetization- Insurance) 4

5 Making Sense of the two Narratives There is (still) no way to disentangle one narrative from the other There is a sort of «observational equivalence» The best we can do for the moment is to look at some stylized facts and check whether they are or not coherent with the two narratives We can check: Fiscal Profligacy External imbalances (excess savings/consumption) 5

6 No clear public finances pattern for the PIIGS 6

7 But a pattern can be spotted in external imbalances 7

8 Lessons from the Crisis Suggestive evidence does not support the Berlin View If anything, it points to structural imbalances Yet, the Berlin View won the policy debate Adjustment is only carried on in the peripheral countries Austerity is generalized to core countries The entry into force of the fiscal compact tightens the rules aimed at preventing discretionary fiscal policy 8

9 Is There Life without a Fiscal Union? No monetary union survived without eventually evolving into a fiscal/political union Mme Rodrigues reminded us this morning that some fiscal capacity for the Eurozone is a necessary condition for proper working of the EMU Problem is, this is politically unfeasible We need to put in place surrogates of fiscal fderalism Eurobonds Common deposit insurance A fully fledged Lender of Last Resort EU Wide Unemployment Benefits Scheme 9

10 EU Unemployment Benefits Excellent and neglected proposal by the Commission (2013) It relates its introduction to need to correct imbalances It proposes budget neutrality across the cycle (contribution related to the output gap Proposal along the same lines by the French Treasury and recently by Pier Carlo Padoan In the US a large chunk of state imbalances is absorbed by federal transfers in the form of unemployment benefits Devil is in the details. Criticisms mostly dealt with the principle of subsidiarity and permanent contributions The benefit should be additional and precede national benefits Main issue is computation of contribution to the unemployment fund 10

Can the euro still be saved? Morning session: the threats

Can the euro still be saved? Morning session: the threats Anton Brender and Florence Pisani Berlin, June 17 1 Fiscal and monetary policies: some problems have not yet been fully fixed! Budget balance Budget